What Arethe Downsides To Investing In Gold & Silver
At the beginning of this guide we answered the question, why invest in gold and silver? Pointing out the advantages.
But to give a full presentation of the facts, we also need to discuss the downsides, and there are a few:
Gold and silver dont provide a cash flow.
Neither pays interest and dividends, so the entire play will depend upon a rise in value. Gold-mining stocks are sometimes the exception, since some pay dividends.
But for the most part, you wont earn any income on your investment during times when the price of either metal is flat or declining.
Central bank gold sales.
The price of gold remained relatively flat during the 80s much of the 90s. But in the late 90s, central banks began selling off reserves.
When they did, the price of gold plummeted to under $300 an ounce. Since central banks continue to hold close to 1 billion ounces of gold in reserve, future sales cant be ruled out.
However, it does need to be stated that in recent years the central banks of Russia, China, India, Turkey and other countries have been increasing their reserves.
The low interest rate/rising stock market environment may continue a few more years.
If it does, you probably wont see much return on your metals position.
An interest rate spike.
The interest rate spike of the early 1980s put a lid on the 1970s boom in precious metals prices. Should the same situation play out again even during a time of economic and financial turmoil it could have the same effect.
It Wont Provide You With An Income
If youre seeking an income from your investments, gold wont pay you any interest, nor will it provide you with any dividends. Instead the hope is that gold will provide you with long-term capital returns, although as with other forms of investment, there are no guarantees and you could get back less than you put in.
Gold In The Modern Economy
Even though gold no longer backs the U.S. dollar , it still carries importance in today’s society. It is still important to the global economy. To validate this point, there is no need to look further than the balance sheets of central banks and other financial organizations, such as the International Monetary Fund. Presently, these organizations are responsible for holding almost one-fifth of the world’s supply of above-ground gold. In addition, several central banks have added to their present gold reserves, reflecting concerns about the long-term global economy.ï»¿ï»¿
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Ways To Invest In Gold
The following table shows the many ways you can invest in gold:
|Gold Investing Method|
|Jewelry like rings, necklaces, and bracelets made with gold.||-Easy to acquire-Has value to the acquirer||-High markups|
|Gold formed into bars or ingots.||-Direct exposure to the price of gold-Tangible ownership||-High costs for storage and insurance-No upside beyond gold price changes-Fairly illiquid|
|-Direct exposure to the price of gold-Tangible ownership||-No upside beyond gold price changes-Cost of storage|
|Equity ownership in a publicly traded gold mining, streaming, or royalty company.||-Upside to the price of gold from production growth-Potential to earn dividend income||-Risk of underperforming the price of gold-Exposure to other commodities|
|Proves ownership of a specific amount of gold.||-Direct exposure to the price of gold-No need to own physical gold||-Only as good as the company that backs them-Only a few companies issue them-Largely illiquid|
|Exchange-traded funds and mutual funds that own physical gold bullion or shares of gold mining stocks.||-Highly liquid|
|Derivative contracts that provide exposure to the price of gold.||-Direct exposure to the price of gold-No need to own physical gold||-Highly risky-Potentially costly to roll contracts forward|
Table by author.
Here’s a closer look at these gold investment methods.
When Is The Best Time To Invest In Gold & Silver
Much like investing in stocks, its generally not possible to time purchases and sales of gold and silver with any precision. But as a general rule, the best time to buy any asset is when its either undervalued or in a prolonged holding pattern.
There doesnt seem to be much evidence that either gold or silver are currently undervalued. But the markets for both metals have been quiet for the past few years, particularly since gold hit an all-time peak price of $1,900+ in August 2011.
It has since eased back, but has been hovering around $1,500 during much of that time. With metals prices trading in a tight range in recent years, now seems to be as good a time as any to buy in.
While we seem to be in the late stages of the current economic and financial market upturns, storm clouds are certainly gathering on the horizon.
Since precious metals tend to react to instability, theres plenty to be found. Examples include:
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Invest In Gold By Purchasing Stock In Gold Miners
Investing in the stock of companies that mine, refine and trade gold is a much more straightforward proposition than buying physical gold. Since this means buying the stocks of gold mining companies, you can invest using your brokerage account.
Some of the most popular stocks in this sector include:
- Newmont Corp. . Newmont is the worlds largest gold mining company, headquartered in Colorado. It operates mines in North and South America as well as Africa.
- Barrick Gold Corp. . This gold mining giant is headquartered in Toronto and operates in 13 countries around the world.
- Franco-Nevada Corp. . Franco-Nevada doesnt own any gold mines. Instead, it buys the rights to royalties from other gold miners.
Keep in mind, though, that the of gold companies are correlated with gold prices but also are based on fundamentals related to each companys current profitability and expenses. This means investing in individual gold companies carries similar risks as investing in any other stock. Single stocks may experience a certain level of volatility and do not provide you with the security of diversified funds.
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The Bottom Line On Investing In Gold
There are many ways to invest in gold, and each has its pros and cons. While investors should weigh each option to determine the best method for their circumstances and risk profile, gold price ETFs and gold streaming and royalty companies tend to be ideal options for beginning gold investors. They offer lower downside risk compared to other options. They also tend to match the price performance of gold . That helps investors seeking gold’s safety and inflation protection to benefit from a gold investment with more liquidity than a physical gold investment.
What Does Investing In Gold Mean
Like many other assets you might choose for investment, gold is a commodity. However, people tend to put their faith in gold more readily than in other assets, since gold is one of the worlds oldest commodities.
You can invest in gold in several different ways. Choices exist among physical, virtual, and adjacent gold investments. Be sure to learn the differences between these types of investments before you jump into purchasing gold in any form.
The value of gold may change rapidly and frequently. These shifts make gold-based investments a poor choice for people who are anxious about day-to-day performance. So you should only invest in gold if you can handle a bumpy ride that promises risky moments but pledges a substantial potential payoff at the end of the road.
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Why Invest In Gold
Although people will have their own reasons to invest in gold, for many, gold investment is about preserving and protecting their wealth.
In terms of wealth preservation, around £200 would have bought you an ounce of gold towards the end of 1990. If you had bought an ounce of gold, and kept £200 as cash, the gold would now be worth around 650% more. However, the cash would not have increased in value and, due to inflation, would actually be worth less.
Similarly, many choose gold to protect the rest of their portfolio from risk and to add diversity to their portfolio. Very few people would choose to invest all their money in gold as it is always advisable to create a balanced portfolio containing different types of investments. Many investors choose gold for that very reason, allowing them to diversify into different areas. This is said to be because the price of gold is usually negatively correlated to the stock markets gold often risies when other markets fall. This is why, traditionally, gold is seen as a safe-haven investment. In times of market volatility, where stocks and shares plummet, part of this decrease is due to investors moving away from riskier assets into the safe haven of gold.
Lastly, some investors choose gold because of the possible financial returns, especially over a longer period of time. Put simply, if you buy it and hold it until the price goes up, you can sell it hopefully for a profit.
Why Investors Like Gold
Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversifier, says Juan Carlos Artigas, director of investment research at the World Gold Council.
These qualities are especially important for investors:
- Returns: Gold has outperformed stocks and bonds over certain stretches, though it doesnt always beat them.
- Liquidity: If youre buying certain kinds of gold-based assets, you can readily convert them to cash.
- Low correlations: Gold often performs differently from stocks and bonds, meaning when they go up, gold may go down or vice versa.
In addition, gold offers other potential advantages:
- Diversification: Because gold is generally not highly correlated to other assets, it can help diversify portfolios, meaning the overall portfolio is less volatile.
- Defensive store of value: Investors often retreat to gold when they perceive threats to the economy, making it a defensive investment.
Those are a few of the major benefits of gold, but the investment like all investments is not without risks and drawbacks.
While gold performs well sometimes, its not always clear when to purchase it. Since gold by itself doesnt produce cash flow, its difficult to determine when its cheap. Thats not the case with stocks, where there are clearer signals based on the companys earnings.
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Gold Price Prediction Trends & 5
Jeff Clark, Senior Analyst, GoldSilver.com
Most price forecasts arent worth more than an umbrella in a hurricane. There are so many factors, so many ever-changing variables, that even the experts usually miss the mark.
Further, some forecasters base their predictions on one issue. Interest rates will rise so gold will fall. Thats not even an accurate statement, let alone a sensible prediction .
But there is value in considering predictions. It can solidify why one has invested, offer factors that may have been overlooked, or even cause one to revise their expectations.
So while we take predictions with a grain of salt, lets look at what might be ahead for gold price in 2021 and the next 5 years. Well first summarize what many analysts are predicting, and then look at the factors that are likely to have the biggest impact on gold. Ill conclude with the probable prices I see based on those factors, as well as some long-term projections.
This will be fun, so lets jump in!
How To Buy Gold In 2021
For thousands of years humans have coveted gold and todays investors are no exception. Whether you plan to buy the metal in the form of coins, bars or gold-backed securities, there are plenty of reasons to add it to your portfolio.
Gold is considered a safe haven asset because when prices for other investments, like stocks or real estate, drop sharply, gold doesnt lose its value it may even gain value as scared investors rush to buy it.
Whats more, some experts also see gold as the ultimate way to protect your savings against rising prices since its held value for hundreds of years.
But when does it really make sense to invest in gold? And whats the best method? Heres everything you need to know about how to buy gold in 2021.
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Playing Rising Gold Prices With Etfs
Given the popularity of gold, many ETFs can add exposure to your portfolio. But they vary, says Todd Rosenbluth, mutual fund and ETF strategist at CFRA.
SPDR Gold Trust and iShares Gold Trust are the largest gold ETFs by assets, holding $75.1 billion and $29.3 billion, respectively, Rosenbluth says. But they’re also the most expensive, with SPDR Gold Trust charging 0.4% annually and iShares Gold charging 0.25%.
“The highly liquid and heavily traded funds like SPDR Gold and iShares Gold are used more by institutional investors,” Rosenbluth says.
A new class of gold ETFs with lower fees helps investors add low-cost exposure to their portfolios. The SPDR Gold MiniShares and Aberdeen Standard Physical Swiss Gold Shares give investors gold exposure for just 0.18% and 0.17%, respectively. They “have much lower expense ratios and lower share prices that appeal more to cost-conscious retail investors,” Rosenbluth said.
Is Gold A Good Investment
If youre looking to strike it rich with a modern-day gold rush, youre probably in the wrong place. Over the past five years, golds price increased by approximately 36% while the S& P 500 increased by 104% during that same period. So why all the hype?
Because some view gold as a safe haven from inflation and extreme market dips. For instance, during the 2007-2008 bear market, the overall stock market plunged 33%. Gold, meanwhile, only fell 2%.
That said, gold prices can be very volatile, meaning gold isnt an entirely safe investment. In fact, you can easily craft a well-diversified investment portfolio without gold entirely.
But if you want some of that golden gleam in your investment account, aim for it to occupy only a small percentage of your investing dollars.
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Why Should You Invest In Gold
Gold can feel like a volatile investment, but dont let that discourage you. Historically, gold consistently goes up in valueand when other investments fall, gold can see gains. Your gold investment can carry you through periods when your traditional stocks may be faltering.
Gold investments let you choose how hands-on you want to be and then adjust your risk level accordingly. If you like physical assets, you can buy gold bullion or gold jewelry outright. If you prefer diversifying your portfolio, look into gold funds, or acquire shares of mining companies.
What Affects The Price Of Gold
As a rule of thumb, the price of gold rises when there is uncertainty or negativity in other areas of the market and falls when growth is strong in those other areas. This relationship isnt set in stone by any means, but broadly it is the reason why most gold investors hold this asset to hedge against losses in other areas.
Other things that can raise gold prices include:
- Consumption demand are more people buying it for jewellery etc?
- Low interest rates gold prices often have a negative correlation to interest rates
- Weakening US dollar
- Low supply if more gold is being recycled, prices go up
- Geopolitical instability
- Natural events, e.g. good monsoons can raise gold prices, as the affected countries invest more of their wealth and influence global prices
Of course, the reverse of any of the above will tend to lower gold prices.
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How Do I Invest In Gold Mining Companies
You can choose to buy shares in those companies involved in the mining and exploration of gold or invest in financial instruments that base their performance on the future value and changes in gold prices. These include products such as options, futures and spread betting. You can also invest in investment funds that themselves invest in gold to benefit from its value. You do not own any gold in these examples.